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Interview with a famous Russian economist, academician of the Russian Academy of Sciences Mr. Valery Makarov.

Mr. Makarov, what are in your opinion the main problems of Russia’s economy nowadays?

This is a very difficult question. The Russian economy faces at the moment quite a lot of various problems. The most important problem in my opinion is a huge inequality between different classes of the Russian society that has been constantly growing for the last twenty years since the collapse of the Soviet Union. The rich get richer and the poor get poorer. This is of course very dangerous, because when the inequality reaches a certain limit, it leads to dissatisfaction among people and as a result to revolts or even revolutions. Growing inequality means the lack of justice and Russian people attach great importance to justice. That is why we have a very tense situation in the Russian society at the moment.

Another very important problem for the Russian economy is its low efficiency, expressed particularly in a low labour productivity. It means that an average worker in Russia produces a lot less goods than an average worker in Germany or in the U.S. It happens not because we are lazier than people in Western Europe and America but since we have inefficient capital and inefficient equipment and moreover the whole organization of work in our country is very inefficient.

Here is a good example. It takes usually about 18 months to build a normal house. For an average construction company in Russia it is technically possible to build a house within 18 months, but it will need two or three years to get all the permissions for the construction. In the end it takes three to five years to build a house in Russia, while in Western Europe you need two years. A Russian worker can hammer a nail into a wall as well as a German worker, but the whole organization of work is very inefficient. And this is something that needs serious consideration. The problem number two for the Russian economy is its inefficiency.

What do you think of the economic policy of the Russian government, in particular of the modernization ideology that is being proclaimed by the Russian president Dmitry Medvedev?

This policy sounds very good and seems to be the right one. We really need to modernize our economy just like the most developed countries of the world do. Everything is right. But in practice modernization is rather a beautiful slogan. People in Russia do not understand what modernization really is. Or, to be precise, everyone understands by a modernization something different. Certain strategies, certain plans, what we really should do – everyone understands it in his own way. We have already had lots of beautiful slogans in the history of Russia. In the Khrushchev era for example – “We will soon live under communism”, in the Gorbachev era – “Perestroika will solve all our problems” and so on. “Modernization” is just one of these beautiful slogans, that one likes to use in different speeches, but what it really is – people do not know it and do not understand it.



From your point of view how could Russia get rid of its dependence on oil and gas?

The problem of Russia’s dependence on oil and gas definitely exists. There are scientific researches that show that the growth rate of the Russian economy partially depends on oil prices. The Russian economy grows when oil prices rise. How we could get rid of this dependence – there are lots of different ways that different people, among them Russian economists, offer. Some people say that we should develop our machine engineering industry that is in very poor condition at the moment. There are various ideas how to restore this industry, but there is no such an impulse that would start it up.

The main question is “Why is it just the oil and gas sector that is developing in Russia?” The answer is “Because there is a demand for that. The whole world wants our oil and gas”. And what else do we have to offer the world? We used to have a very strong military sector. Now we build a lot less military products than before but I believe we still have a large potential in this field and therefore the military sector could become the locomotive that would help Russia get rid of its oil and gas dependence.

Apropos of machine building, countries of the Third World nowadays have a high demand for floating nuclear power plants. The Third World lacks nuclear power but building a power plant there would cost a lot of time and money. As you know, nobody except us can build atomic icebreakers. We could create floating nuclear power plants and sell them to the countries of the Third World.

Russia, the Russian mentality and Russian workers have one peculiarity: we can produce small amounts of goods or single products of very high quality but we are not skillful at producing large quantities of goods. Here we always lose since we do not manage to organize mass-production properly. Floating nuclear power plants are single products and in this field we could succeed. We can make science intensive single products that other countries need. I believe it is a good way of getting rid of oil and gas dependence.

In your opinion how could we solve the problem of a very high income inequality in Russia?

A very high income inequality is the problem number one in our country. And it will take a lot of effort to get rid of it. First of all we need a new tax system. At the moment rich people in our country pay the same taxes as poor people, although they should of course pay a lot more. The land tax and the real estate tax are extremely low in Russia. In the suburbs of Moscow you can find lots of huge luxury mansions that cost hundreds of millions of dollars while the tax rates for them are very low.

The money that we could get from the land tax and the real estate tax could help poor people in our country. The most important thing is to give them an opportunity to find their way in life. Those who live in little towns and villages in Russia do not have any opportunities at all. Many very talented people really do not know where they could express themselves. We should create these opportunities and for this purpose we need the support of our government.

According to the rating of the organization “Transparency International” the level of corruption in Russia is a lot higher than in Western Europe. Do you think it is possible to solve this problem in Russia?

I believe this is a problem that can be solved. The reason of an extremely high level of corruption in Russia is from my point of view quite obvious. In Germany or the U.S. the strongest cluster in the society is the cluster of entrepreneurs, those who earn money and build the economy. In Russia, by contrast, the strongest social cluster nowadays is the cluster of bureaucrats. At the moment they are the most important people in this country.

If a bureaucrat earns a fixed salary, then the only way for him to get rich is to steal. Russian bureaucrats are highly qualified in this field. Moreover, the laws in our country stimulate corruption. You can solve any problem if you bribe a bureaucrat. Just like in my example with the house. In order to build a house you first need to spend three years getting various permissions from different clerks.

What we really need is a system of equal rights for all social clusters: for scientists, bureaucrats, military people and so on. If they all get equal rights, then there will be no such problems in our country. But for that we need a big reconstruction of our society.

One more way to fight corruption is to create transparency. Theoretically and technically it is possible because we have Internet and for example every money transaction – apart from those that need special protection – can be published on the Internet. If for example one million dollars is spent for construction of several houses, then the whole information about it should be put on the Web, so that other people can see it. Every joint-stock company should show its budget not only to its shareholders but also to everyone else. Then it will be a lot more difficult to steal. This requires of course a lot of time and money but in my opinion it is the best way to fight corruption.

Do you believe economic science can help solve the main problems of the Russian economy?

Yes, of course! This is exactly the purpose of economic science. Just like every other science it studies the reality. The English philosopher Francis Bacon once said that a science should read the book of life. And economists read this book, observe what happens in the reality, give their recommendations and build theories and models that enable a better understanding of life. Scientists understand what happens around us probably better than other people - they see the roots of problems.

The modern economic science is unfortunately too one-sided. The most influential economists today are all experts on market economies. If you take a look at Nobel Prize winners in Economics since 1967 – these are more than 50 people – you will see that they are all specialists in market economies. And in the reality there exist not only market mechanisms but also a rationing mechanism, for example, that has not been studied enough so far, although it is very important.

In our country we have goods that are distributed not by the market mechanism. For example, flats. Only very rich people in Russia can buy flats here. The others, for instance military people, should obtain flats with the help of the rationing mechanism. Or if we take a look at the public health sector in Russia - why are some medical services free of charge and some are not? This is also a good example of a rationing mechanism that economists need to study more deeply.

Where in the modern world do we have market economies? In the USA, Western Europe, Singapore, Japan and in some other states. And the rest of the planet – these 4 or 5 billion people have totally different economic models. Even such a super developed country as the United Arab Emirates is not a market economy. They have an economic model that is different from those described in modern textbooks. Even banks in this country work in a different way. As you know Islamic banks do not have interest rates and serve their customers not like European banks do. Unfortunately nowadays it is hard to find a good economist who has studied all that. The economic science is at the moment too one-sided and I really do not know what to do here.

What competitive advantages does Russia have in the global economy?

Russia has quite a lot of different competitive advantages. One of them has already been mentioned - we are good at making single high quality products. We do it better than people in other countries.

There are lots of advantages that we inherited from our ancestors. First of all, this is our huge territory. No other country of the world has such a large territory. We have many different natural resources such as sweet water and forests. It is very important to use them right, to preserve and to share with the rest of the world. We still do not have the right mechanisms for that. But this is really our huge competitive advantage.

Russian people are very creative and inventive. We have already proved many times that we are good at doing lots of different things. The first television set in history was made by the Russian engineer Vladimir Zworykin. The first radio receiver was created by the Russian physicist Alexander Popov. Russian inventors Yefim and Miron Cherepanov constructed the first steam engine. Unfortunately at the moment our creative potential is only weakly exploited because many talented people in our country have no prospects in life. Creating opportunities for them is a very important task for us. If someone is born in Russia, he should have a lot of opportunities here in his motherland and not dream of escaping to another country. Our government somehow does not give it a thought. They talk about everything except this problem.

What are from your point of view the main advantages and disadvantages of Russia’s entry into the WTO?

Russia’s entry into the WTO is in my opinion a rather controversial issue since I see there some definite advantages and some definite disadvantages for us. In some fields we get advantages, for example in the automotive industry. In some fields we get only disadvantages, for instance in agriculture. Unlike cars, agriculture cannot be moved from one place to another. If something grows somewhere, then it grows only there.

I find China’s policy regarding its WTO entry very wise. They joined the WTO a long time ago but with lots of different restraints. And Russia is ready even before its entry into the WTO to fulfill all their requirements. I believe this is wrong and somehow even insults our national pride. An entry just for entry’s sake should not be our aim.

What do you think, is there anything that we should borrow from other countries of the world and adopt here in Russia?

I believe the most important thing that we should borrow from other countries of the world is a right distribution of power between different levels of governance. We have several levels of governance in Russia. These are municipalities, federal subjects and so on. In Germany for example federated states have a lot more authority than our municipalities. In Russia everything is managed at the federal level, even courts and the police. It leads to a suppression of initiative from below. That is why young people in the Russian provinces do not have any opportunities in life. They just have nowhere to go.

It is an important aim to unfold the potential of the very bottom. Here we need to study experiences of different federal states such as Germany, Canada and even India. In India there is of course a lot of chaos, but nevertheless they have freedom at the lowest level. This is something Russia does not have.

In Russia there is a so-called power vertical. It was introduced by Vladimir Putin in order to avoid the break-up of the country. This was actually a wrong idea. Now our government does not know how to get rid of this power vertical. In fact there is no need to invent something new here. We can just take a look at other countries that have already experienced all that and try to borrow their methods.

One American company has recently conducted a survey among expats working in Russia asking them how they could characterize their Russian colleagues. A lot of foreigners said, that most Russians believe in wonders. How can you explain that?

From my point of view this is a rather simplistic perception of the Russian mentality. Russian people are really very sensitive about different ideological and spiritual stuff. If there are no special signals from up above, then something is not right. We do not have such a down-to-earth rationalism like people in other countries do. The Russians always want to have some ambitious target. That is why communism managed to take root in Russia. The aim was totally unachievable but we used to like it. Nowadays people say that we need some kind of a national idea.

We are observing a rapid growth of Orthodox Christianity in our country at the moment. The number of churches and churchgoers is constantly increasing – this is something that does not happen anywhere else in Europe. In Russia it is happening because our people always need something special. The Orthodox Christianity per se is based on belief in wonders. People were canonized after it had been proved that they can make wonders.

Different fantastic ideas spread in our country very often and very fast, a lot faster than in Western Europe and the USA. At the moment, for example, everywhere in Russia, even on main TV channels people discuss a hypothetical apocalypse in 2012. The Russians are somehow very sensitive about such mystical things. If Nostradamus said something or something is written in the Maya calendar, then it will definitely happen. Different spiritual stuff has a larger influence on people in Russia than in other countries of the world. That is why I partly agree with this statement, but only partly.

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  November 2012 Despite rich natural resources in addition to a skilled and educated labor force, the Russian economy has not succeeded in achieving its potential, because of the slow pace of industrial rehabilitation and the lack of confidence in the banking system, among other reasons. The main sources of Russia's GDP according to the CIA fact book are services(62.7%), industry(27.5%) and agriculture(9.8%). More than 50% of exports are from oil and gas. Metal is another significant export. The main imports are made up of machinery and equipment. Other significant imports are agricultural inputs and food. In the year 2011 the main export, some 12.8% was to the Netherlands. Exports to China in that year amounted to 7.3% of the total. Approximately 5.8% of Russia's exports reached Italy. 16.9% of the imports that year were from China. Other significant sources of imports are Germany which account for 13,2% of the total imports followed by Ukraine with 7%. From the aspect of natural resources, considerable deposits of oil and gas, coal, precious metals, iron, copper and zinc are to be found in Russia as well as large tracts of timber. An analysis of the main economic indices shows that the GDP increased in 2010 and 2011 by 4.3% compared to a decrease of 7.8% in 2009. The annual rate of inflation for in 2011 was 8.4% compared to 6.9% in 2010 and over 10% in each of the years 2008 and 2009. The main problem in the Russian economy is the rate of unemployment. The unemployment rate in 2010 reached 7.5% compared to 8.4% in 2009. The estimated rate for 2011 is a further decrease to 6.7%. According to the CIA fact book the per capita GDP for the year 2011 (ppp) is 17,000 dollars, which is significantly lower than that of the developed countries in the west. Russia has a budget surplus of 0.4% of its GDP in 2011 and a public debt reaching 8.3% of the GDP .    
 

htthttp://www.economy.com/dismal/outlook/country.aspx?tab=1&edition=1&geo=IRUSp://www.worldwide-tax.com/russia/rus_over_economy.asp

As expected, Russia’s economic performance weakened in the second quarter amid falling external demand and slower consumer spending. Real GDP rose 4% y/y after a 4.9% expansion in the previous period. We expect further growth moderation in the second half of 2012 on the back of falling exports and weakening domestic demand.

Read the complete release analysis.

Unemployment
Actual: 5.3% • Previous: 5.2% Next Release: 12/20

Russia's unemployment rate rose slightly to 5.3% in October on a not seasonally adjusted basis. The number of people out of work increased in October to 4.02 million. The longer-term outlook remains subdued as a moderation of domestic demand, together with worsening global growth, will slow the economy over the coming quarters.

Read the complete release analysis.

Industrial Production
Actual: 1.80% • Previous: 2.00% Next Release: 12/17

Annual growth in Russia's industrial production decelerated in October reaching 1.8% y/y. The growth momentum in manufacturing gained in previous months subsided somewhat but remained fairly robust driven by new order inflows as well completion of existing workloads. Yet the growth in new orders was mainly fueled by domestic demand while a fall in export demand was registered. Industrial output growth is expected to remain under pressure over the coming months.

Read the complete release analysis.

Foreign Trade
Actual: US$17.1 bil • Previous: US$12.6 bil Next Release: 12/12

Russia’s merchandise trade balance reported a surplus of $17.1 billion in September, up from $12.6 billion in the previous month. Exports increased 0.5% y/y, driven by fuel and energy products, while imports declined 2.3% y/y amid the moderation in consumer demand. The ongoing deceleration of the global economy and the removal of certain import tariffs due to entry into the WTO are expected to worsen the trade balance over the coming months.

Read the complete release analysis.

Monetary Policy
Actual: 8.25% • Previous: 8.25% Next Release: 12/10

Russia’s central bank did not change monetary policy in November for the second month in a row. The refinancing rate was left at 8.25%, the overnight deposit rate at 4.25%, and the overnight auction-based repurchase rate at 5.5%. The decision to keep interest rates unchanged was driven by the October’s moderation of inflation, combined with still-strong domestic demand supporting growth momentum and positive business sentiment in manufacturing.

Read the complete release analysis.

 

Indicators Data Next
Business Confidence 24-Dec
Consumer Price Index 05-Dec
Foreign Trade 12-Dec
GDP 02-Jan
Government Finance 19-Dec
House Prices 01-Feb
Industrial Production 17-Dec
Monetary Policy 10-Dec
Producer Price Index 17-Dec
Reserve Fund 07-Jan
Retail Sales 20-Dec
Unemployment 20-Dec



 

 

Key Economic Indicators in 2012   (as % of corresponding period of previous year)

 

  Jan. Feb. Mar. Q1 Apr. May June H1 July Aug. Sept. 9 months Oct. Nov. Dec. Total
Output index for the key economic activities* 105.3 107.1 103.0 105.0 102.8 104.4 102.5 104.1 102.7 101.9 100.1 103.2        
Industrial output index 103.8 106.5 102.0 104.0 101.3 103.7 101.9 103.1 103.4 102.1 102.0 102.9        
Agricultural output index 102.5 103.9 104.9 104.0 105.0 104.7 103.3 104.2 96.5 96.2 92.3 97.7        
Transport freight turnover 104.4 103.5 103.4 103.8 101.6 99.1 98.6 101.8 100.5 102.8 104.2 102.0        
Fixed capital investment 116.4 116.2 117.0 116.6 108.6 111.1 106.3 111.6 103.8 102.3 98.7 107.2        
Retail trade turnover 107.4 107.9 107.4 107.6 106.8 107.1 107.1 107.3 105.4 104.3 104.4 106.3        
Consumer price index 104.2 103.7 103.7 103.9 103.6 103.6 104.3 103.8 105.6 105.9 106.6 104.6 106.5      
as % of December of previous year 100.5 100.9 101.5   101.8 102.3 103.2   104.5 104.6 105.2   105.6      
Core inflation, as % of December of previous year 100.5 100.9 101.4   101.7 102.0 102.3   102.9 103.5 104.2   104.8      
Industrial producer price index, as % of December of previous year 99.8 100.8 103.0   103.7 101.2 100.4   99.2 104.3 109.4          
General rate of unemployment (calculated by ILO methodology), as % of economically active population 6.6 6.5 6.5   5.8 5.4 5.4   5.4 5.2 5.2          
Real disposable money income 101.0 103.1 102.8 102.4 2.4 104.5 105.0 103.2 102.2 106.8 103.8 103.6        
Spending on goods and services** 105.3 108.4 107.8 107.2 107.0 107.8 107.7 107.3 106.5 105.8            
Urals crude price***
US dollars/barrel 109.8 119.2 123.3 117.5 117.8 109.2 93.5 112.2 102.7 113.5 112.0 111.2 110.8      
as % of corresponding period of previous year 116.5 117.9 110.5 114.6 98.4 97.6 83.5 103.6 89.1 103.5 99.4 101.4 101.9      
Commodity exports****
billions of US dollars 39.7 45.2 46.9 131.8 45.1 45.8 41.0 263.7 40.6 42.1 44.0 390.4        
as % of corresponding period of previous year 130.9 115.1 107.4 116.4 98.3 105.0 92.7 106.8 96.8 94.4 100.5 103.5        
including oil exports
as % of corresponding period of previous year 134.6 106.9 111.5 116.2 91.5 113.4 79.3 103.5 92.6 91.8            
Commodity imports****
billions of US dollars 19.2 24.8 28.6 72.6 26.8 28.1 26.9 154.4 29.6 29.4 26.9 240.4        
as % of corresponding period of previous year 117.8 113.6 106.1 111.5 98.8 99.9 97.0 104.3 107.7 97.5 97.7 103.0        
Official Ruble/US dollar exchange rate at the end of period, rubles per dollar 30.36 28.95 29.33 29.33 29.36 32.45 32.82 32.82 32.19 32.29 30.92 30.92 31.53      

 

Source: the Federal State Statistics Service, the Bank of Russia.
* Calculated on the basis of data on changes in output volumes in agriculture, mining, manufacturing, the production and distribution of electricity, gas and water, construction, transport, retail and wholesale trade.
** Estimate.
*** Calculated on Reuters data, averages for a period.
**** Based on the balance of payments methodology (as of November 9, 2012).

 

Updated November 13, 2012.

 

 

 

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